Trade talks at Cancun broke down principally because
the G-20 group ofmainly
larger developing countries rejected U.S. and EU offers on reducingtheir agricultural protection. Two years later, as the Hong
Kong Ministerialapproaches,
agriculture remains the make-or-break issue in the Dohanegotiations. But the impasse can be broken once we clear up themisinformation on (a) the magnitude of EU and U.S. subsidies and
(b) thelevel of protection
through trade barriers in developed and developingcountries in agriculture. Twice recently, the New York Times has
editorialized that "developed worldfunnels nearly $1 billion a day in subsidies," which
"encouragesoverproduction"
and drives down prices. The World Bank's president, PaulWolfowitz, similarly referred to developed countries expending
"$280 billionon support to agricultural producers" in a recent op-ed
in the FinancialTimes. Oxfam
routinely accuses rich countries of giving more than $300billion annually in subsidies to agribusiness.

Astonishingly, these estimates bear virtually no
relationship to thesubsidies
actually at the heart of the Doha negotiations. Instead, they havetheir origins in the altogether different measure called the
ProducerSupport Estimate (PSE)
and published by the Organization for EconomicCooperation and Development. The PSE includes all measures that
raise theproducer price
above the world price, including border measures such astariffs and quotas. Most economists would find the identification
of such ameasure with
subsidies unacceptable.

To measure the true magnitude of subsidies that drive
down world prices, weneed
consider only those subsidies contingent on exports or output. Whenthis is done, the extent of subsidies turns out to be
considerably smallerthan $1
billion per day. Thus, rich country export subsidies that have beenso much in news have considerably declined in importance recent
years: theycurrently amount
to less than $5 billion, perhaps as little as $3 billion.Subsidies contingent on output (called domestic output subsidies byeconomists and identified as "amber box" subsidies by the
WTO) are larger;but they,
too, are much smaller than commonly believed. Under thecommitments made in the Uruguay Round Agreement on Agriculture, WTO
membershave achieved
substantial reductions in these subsidies. The EU has made aspecial effort to decouple its domestic subsidies from output
as a part ofthe reform of
its Common Agricultural Policy.

Based on the latest data available from the WTO,
domestic output subsidiesamounted
to $44 billion in 2000 in the EU, $21 billion in 2001 in the U.Sand less than $15 billion in 1998 in Japan, Switzerland, Norway and
Canadacombined. Recognizing
that there have been no major cases of backsliding andthe EU has made further progress in decoupling its subsidies from
output, wecan comfortably
conclude that rich country domestic subsidies that encourageproduction and lower world prices currently are substantially below
$100billion.

By focusing exclusively on subsidies, the media has
distracted attentionfrom the
critical fact that the most important obstacle to agriculturaltrade comes from border barriers, also called market access
measures by theWTO. And
since the developing countries are not big offenders on the subsidyfront, this focus has promoted the false impression that
agriculturalprotection is an
exclusively rich country problem. In reality, when it comesto border barriers, developing countries more than match developedcountries.

Among the latter, Japan and Europe exhibit high
protection while U.S.barriers
are relatively low. Thus, in 2001, the trade-weighted averagetariff was 36% in Japan, 29% in the European Free Trade Area, 12%
in the EUand 3% in the U.S.
Of course, these averages mask considerable variation inprotection across commodities.Among developing countries,
relatively moreprotected
countries include South Korea with a trade-weighted average tariffof 94% in 2001, India with average tariff of 44%, China with 39%
andPakistan with 30%.
Interestingly, protection in the developing countrymembers of the Cairns Group, which contains countries with greatestcomparative advantage in agriculture, is not low: in 2001, the
averagetariff was 13% in
Argentina and Brazil, and 11% in Malaysia, Thailand andIndonesia.

Once we recognize that export subsidies are minuscule
and trade-distortingdomestic
subsidies much smaller than commonly believed, a successful Dohabargain seems within reach. The elimination of export subsidies andsubstantial cuts in domestic subsidies are feasible. But these will
have tobe complemented by
additional measures to make the final deal attractive toall nations engaged in active negotiations.

The U.S. has a comparative advantage in agriculture.
Therefore, it insistson
within-sector reciprocity in the form of market access in return for itsconcessions on subsidies. The EU and larger developing countries
includingthe Cairns Group,
who have high agricultural tariffs, are in a position tooffer this reciprocity. The EU lacks comparative advantage in
agriculture.Therefore, it
will only be giving concessions in this sector so that itneeds cross-sector reciprocity. Here larger developing countries
have acrucial role to play.
Industrial tariffs remain high in the Cairns Groupdeveloping countries as well as in India, China and Pakistan. They
can offerthe EU the
necessary reciprocity.

Finally, Latin American members of the Cairns Group
will clearly derivelarge
benefits from the rich country reductions in subsidies and tariffs inagriculture and can therefore offer reciprocal concessions in
industrialgoods and
services. Other larger developing countries such as India, China,Pakistan, Indonesia, Korea and Thailand also stand to benefit
from increasedaccess to each
other's and other developing countries' markets in industrialgoods. In addition, they can expect to benefit from the
removal ofindustrial-tariff
peaks in the developed countries that apply with potencyto labor-intensive products such as apparel and footwear.

Thus, once we cut through the confusion created by
constant references toinflated
estimates of agricultural subsidies and consider the accuratepicture, outlines of a successful negotiation do emerge.
Those who considerthe
barriers to a deal insurmountable need to be reminded that unlike theUruguay Round, which dealt with win-lose bargains such as
those onintellectual-property
protection, this round is focused on tradeliberalization that largely offers win-win bargains. Both developed
anddeveloping countries
stand to reap large benefits from the removal of theirown subsidies and protection.